ECON 50 Chapter 1: Econ 50 Chapter 1 reading
Document Summary
Example to consider: apartments in college town, some apartments close to college, others far away. Exogeneous price not determined by forces in model. Price of inner ring apartments: endogenous variable. Endogenous variable: determined by forces described in model. Assume all apartments identical in every respect except location. Optimization principle: people choose best patterns of consumption they can afford. Equilibrium principle: prices adjust until amount that people demand is equal to amount supplied. Note: at any given time people"s" demands and supplies are not compatible and always something is changing (can cause instability in system but rare), but equilibrium price is fairly stable for apartment rent. Consider possible renters of apartments and ask them maximum amount they are willing to pay. Example: highest price someone pays is 500. If price is 500, then only one apartment is rented out to the highest bidder. Next highest is 490, but even at 499 there will only be one person renting apartment.